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I've read a title in the news proposing a zero corporate tax. Thinking about it I couldn't figure a good reason against.

Why couldn't a country just set the corporate tax rate for firms to zero and then tax any gain obtained via negotiating shares or receiving dividends? Tracking the latters seems way easier (via a digital national registry of ownership and trades and mandating disclosure of dividends ) than burdening firms with complicated tax codes and the state with the burden of chasing them.

I am sure I am missing some theoretical and real world complications, so please, enlighten me.

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  • $\begingroup$ If you are not going to tax capital gains at the same rate as dividends, and at the time that shares go up in value rather when they are sold, you may see dividends disappear and government tax receipts go down. $\endgroup$
    – Henry
    Nov 29, 2016 at 0:36
  • $\begingroup$ Do tax them at the same rate, the income tax bracket of the person receiving it. $\endgroup$
    – Three Diag
    Nov 29, 2016 at 0:49

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It is possible to structure business entities in most if not all countries as pass through structures (e.g., limited liability corporations, sole proprietorships, or general partnerships). Such entities are not taxed at the corporate level. Tax liability instead flows through to the principals who own not shares but partnership interests.

Your question should therefore be restated: what advantage is there to reducing the corporate tax rate to allow shareholders to pay less tax than if profits flowed through to their personal income tax returns?

The answer to that question is data-dependent. In some economic environments, it is useful to encourage corporate investment through corporate tax cuts. We are not in such an environment today, however. There is now a very wide and deep literature on how corporations have been saving more than they have been investing since the 2007-09 financial crisis. Corporations have been hoarding cash or distributing capital to stockholders in the form of dividends and share buybacks more than they have been investing in future productivity and profitability growth. Corporate tax cuts would therefore likely increase wealth inequality because they would flow through to already wealthy shareholders.

The only argument for reducing the corporate tax rate today has to do with international competitiveness. The top tax rate for U.S. corporations is 35%. In Ireland it is 18%. If you ran a giant multinational, you might want to "invert" and re-domicile to Ireland or any other lower-taxing country. The U.S. tax code has so many loopholes that through clever use of intercompany debt, net operating loss carryforwards, and operations overseas, it is possible bring the effective tax rate for a U.S. domiciled multinational closer to 10-15% over longer time horizons. We should obviously attempt to set corporate tax policy to limit inversions, but many companies already pay less than they would if they were headquartered overseas.

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  • $\begingroup$ Hmm, but directors would not choose to hoard cash, after all, employees and directors got to pay for food and lodging, using their salary, which is taxed. Hoarding cash makes no sense, money is either distributed or reinvested. $\endgroup$
    – Pacerier
    Aug 23, 2017 at 23:18
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One of the main arguments against it is the political unpopularity of the idea.

Most people do not (nor should be expected to) understand the economics behind the many different potential tax schemes. The issue doesn't even seem to be clear among economists.

If the government desires to raise tax revenues, the primary "cost" is the opinion of the voters, not actual impact the tax has on the economy.

An example is the repeal of the HST (sales tax) in British Columbia. The economic consensus seems to be that the new HST was more efficient than the old PST. However, a referendum repealed the HST in favor of the less efficient PST.

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  • $\begingroup$ While this is interesting and I guess strictly speaking answers my question, I am more interested in whether this is feasible in terms of underlying incentives, whether the tax burden is shifted, whether there are obiovous gaps to avoid taxation through this etc. $\endgroup$
    – Three Diag
    Nov 29, 2016 at 10:21
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The argument will fall apart when you inspect it with common sense and simple terms. Tax is anything but "COST" to company. The argument is all about removing such "COST" and convert to "PROFIT GENERATING INVESTMENT". Sound great, but it is anything but playing with sentences.

Let me explain why. Most people think investment is all about "putting money on create new stuff to generate profit", but there is a hidden investment in modern society : infrastructure investment: education, utilities, road system, regulation, security, law enforcement , etc.

Zero corporation tax advocate selectively skip cost on infrastructure investment, they keep pretend infrastructure are pop up from nowhere and cost nothing. On the contrast, such infrastructure and bureaucratic are not free, even is not efficient, it is still cheaper than ANY corporation "invest" in such infrastructure.

If all corporation exploit on the collective "infrastructure investment" to generate profits, but nobody pay "cost" (AKA TAX) , then who is going to pay for the such "investment"?

In entrepreneurship, we call the cost that pay to use some other facilities as "rent", which is categorised "cost". OTH, Tax is anything but actually a "rent". Ironically, corporate tax are somewhat "generous" in a way that base on "profit".

Argument may continue and say the "tax"(AKA rent) not justifiable and proportion to the facilities consume. I will say , we are not living in a perfect world.

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